Fri, 23 May 2003

Andrew Sullivan takes a potshot at deficit
spending, and deservedly so. A lot of people think that
government spending can somehow improve an economy. "Economic
development", it's called. No, no, and no. When a government takes
money from people in the form of taxes or inflation, it is destroying
one kind of spending and replacing it by another.

Now, it may be that the current owners of the money (or more
properly, liquid value) don't want to spend it. Maybe they want to
keep it as capital. And yet, capital does nobody any good (earns no
interest) unless somebody spends it. It's a completely wrong
idea to think that government spending does anything other than
replace private spending.

So when talking about government spending, the first and foremost
question is "is it wise spending"? Is the money going towards capital
or consumption? If you educate someone in something useless
(e.g. underwater basket-weaving), that is consumption. If you educate
them in something useful (and I'm not smart enough to give any
examples of what will be useful; only what might be useful, but
heck, you can do that as well as I), that is a capital investment.

If a government builds a road, is that capital investment? Not
necessarily. If the road goes nowhere anybody wants to go, it's
consumption. If the road replaces a congested road, it's capital
(maybe; there are better ways of dealing with congestion; public roads
are subject to commons tragedies).

Consumption isn't necessarily bad. People consume all the time.
Entertainment is consumption. Consuming something which is currently
capital is wasteful. Coercing someone's capital away from them, and
consuming it is very, very bad. It makes society in general worse
off. Unfortunately, most government spending is consumption, simply
because governments aren't wise enough to spend other people's money
as well as the person would.

Now, of course people consume their own capital, and of course
people spend their own money foolishly. No one thinks otherwise. The
real concern is whether governments waste money more often
and to a larger degree than private spenders. There is plenty of
evidence that they do.

A society with a large private sector is more resiliant than a
society with a large governmental sector simply because the number of
decisions that are being made is larger, and the amount of resources
they are made over is smaller. People make mistakes, and the more
powerful a person the more significant their mistakes. Oh, if you
could get power to wise people, you could address this
problem. Unfortunately, wise people don't seek power, being wise after
all, you see.

Hrm. I see that I haven't said a word about deficits, have I?
That's probably because the real problem with deficits is that they
are just another form of government spending. Deficits are bad simply
because all government spending is bad (or at least, not as
good as the private spending it replaces). Doesn't matter how you get
the money, whether by borrowing it (deficits), by coercing it
(taxation), or by printing it (inflation).

Please understand that I am completely unswayed by any amount of
anecdotal evidence. Sure, you can point to a lot of
government spending that has improved people's lives. That's not the
point. The point is that people would have been even better off if
the money had been spent by its owner.

All of that said: the only problem that a government can solve is
transaction costs, and it does so at a cost of its own. Only by
comparing those two costs can you properly decide if the government
spending makes sense or not. Far too many people look at the end
product, value it, ignore the cost of government spending, and skip
over the comparison. This is an ineconomic idea. The science of
economics exists to answer these questions. Skipping over the
question doesn't answer it.